As the curtain goes up this week on Russia’s newest shipbuilding company, the 100% state-owned United Shipbuilding Corporation (USC), maritime sources say the curtain may be coming down on St. Petersburg yard, Baltic Plant (“Baltiysky Zavod”).

Baltic is owned by the United Industrial Corporation (UIC) of Sergei Pugachev, who also owns Northern Shipyard (“Severnaya Verf”) in St. Petersburg. For some time Pugachev has been hoping to consolidate the Baltic works on the territory of Northern, and then dispose of the Baltic yard’s land for real estate development. The city government of St. Petersburg, which holds a golden share in Baltic, is vetoing that idea for the moment. But Baltic currently owes an estimated Rb4.5 billion ($132 million), and its newbuild order-book and current cashflow are running down. State shipyard officials, who announced the formal chartering of USC on April 7, have been contemplating a takeover of Northern, if Pugachev lowers his price. Baltic, they say, hasn’t been part of their plan.

The Baltic yard, Russia’s main producer of icebreakers, submarines, and tankers, seemed a better prospect in 2004, when it was owned by the ICT group, a St. Petersburg-based partnership headed by Alexander Nesis. It had been Nesis’s ambition, hesaid at the time, to leverage his 18% stake in Northern, and with Kremlin backing, to merge the two yards under ICT’s control.

A year earlier,when Nesis announced his bid to acquire the rest of Northern from its then owner Boris Kuzyk, a former advisor to the Yeltsin administration, he claimed: “there are several players on the Russian [shipbuilding] market, who are not strong enough, and for whom it is difficult to compete with the main competitors – foreign companies. The weaker Russian producers should not compete against each other, but should concentrate their resources. This will help solve the problem of pre-financing in developing their products. We want to establish situation of an absolute technological advantage, when noone else besides the holding will be able to fulfill the contract.”

At one stage in the conflict, sensitive documents were leaked that revealed serious supply, standard, and contract violations in Northern’s performance of a top-secret contract to build destroyers for the Chinese Navy.
Nesis proved to be right, but Pugachev proved to be stronger, first eliminating Kuzyk at Northern, and then driving Nesis backwards. Nesis conceded that Pugachev was well-connected. The Russian media claimed the connexions included old career ties to Putin.

In April of 2005, Nesis conceded partial defeat, agreeingto sell his shareholding in Northern to Pugachev. A spokesman for Nesis said at the time: “The essential point is that the stage of war has changed to a stage of peace. Everybody is happy.” Baltic, he explained, wouldconcentrate on civilian vessel construction, while Northern would specialize in naval ships. ICT would supply components and equipment to Northern, which had been withheld during the hot phase of the takeover battle.

Four months later, Nesis conceded that he was selling Baltic to Pugachev, and leaving the St Petersburg shipping sector altogether.One of Nesis’s men explained:”We made the decision to sell [Baltiisky] because the price was attractive. We have always said that these two plants have to be in the hands of one company, but we never said whose hands.” He intimated that the price, not officially disclosed, was “less than $100 million”. That figure was surprisingly low, if Baltic’s order book to 2008 amounted to $700 million, as was claimed. The bottom-line was also reported to be running between an annual profit of $10 million and a loss of about as much.

If Pugachev was as rich as he was later cracked up to be, this wasn’t because of the two St. Petersburg shipyards.

At the start of 2008, Forbes reported thePugachev fortune amounted to $2 billion; London media raised the figure to £3.5 billion; and the Russian Finance magazine claimed he was worth $4 billion. There was no suggestion that these were ill-gotten gains, and in any event, Pugachev enjoyed legislative immunity, for he has been the senator from the Tuva Republic in the upper house of the Russian parliament since December 2001.

In mid-January of 2009, Pugachev got approval for the takeover of the failing French newspaper, France-Soir, from the Commercial Tribunal of Lille. His son, a French passport holder, was the nominee proprietor. No acquisition price for an 85% stake in the title, which has a circulation of less than 23,000 copies, has been published. In February, allegations about Pugachev senior’s past began circulating on Russian websites. Without substantiation, they are unprintable. They have been followed in March by blogger claims that Pugachev has engaged a Moscow PR agency to block publication of the bad news, wherever it threatens.

The agency, known as Secret Advisor, headed by Leonid Levin, describes its mission “to advance the Russian PR-industry and communication sphere, to make them more civilized.” Asked to confirm whether Levin’s agency represents Pugachev and will respond to the allegations, an agency spokesman said they will call back.

Pugachev’s parliamentary office in Moscow, his holding United Industrial Corporation, and the bank he indirectly controls – International Industrial Bank; in Russian, Mezhprombank, MPB – all decline to answer questions about the purpose of the France-Soir acquisition, and whether Pugachev has the means to pay for it. The organizations bar direct access to Pugachev himself.

Mezhprombank is described by a banking specialist at Alfa Bank Moscow as “one of the least public [of Russian] banks. All of its information is very hidden and rarely reported. Their main business is connected with companies belonging to the same group.” An investment memorandum issued in 2005 by Dresdner Kleinwort Wasserstein for the raising of $300 million in bonds claimed that 72% of the bank was controlled by Pugachev, but did not mention his name. Formally, it is believed the bank is owned by a New Zealand registered family trust, and controlled through seven Russian cutout companies.

In September 2008, the bank was rated 30th in Russia by size of assets. At the time, the total was reported to be Rb118 billion (aty the current rate of exchange, $3.6 billion). The bank’s website is obsolete, its last news reported on January 19, 2006.

Standard & Poors, the international corporate rating agency, issued a ratings improvement for the bank in February 2008, lifting it from “B+” to “BB-“, with a forward prognosis of “stable”. The fine print of the ratings announcement, however, carried the warning that the bank’s lending and capital were highly concentrated among related parties, especially Unified Industrial Corporation, Pugachev’s holding.

According to S&P, Pugachev’s bank was characterized by “the absence of an accurate strategy for attracting finance; an unclear strategy of development, in particular concerning retail business; insufficiently developed systems of risk-management and high level of risks.” S&P said it wasn’t sure what might happen to the bank’s capital if the financial markets turned “adverse”. Now that this is exactly what has happened, S&P says the bank is due for a ratings review next month, and that the data for the review are likely to arrive on time. No word of the impact of the financial crash on the bank’s profit and loss line is available.

Why would a man as secretive as Pugachev, with a bank and a holding that avoid published audit reports and public scrutiny, take a seat in parliament and buy a public newspaper in Paris? Not because he says he values free speech, because he doesn’t say anything at all. Nor because he wants to be accountable to electors, shareholders, or clients.

When the English press detected a year ago that Pugachev was negotiating to acquire an interior decorations business from Viscount Linley, a nephew of the Queen of England, it was supposed in the London media that the deal “would ease his entrée to British high society, as he snaps up a clutch of luxury brands in western Europe.” Pugachev was reported at the same time as owning a chateau near Nice, and two villas near Cap Ferrat. For some reason the acquisition announcement, which was reported to be imminent in January 2008, has not materialized. Linley is currently offering a Claridge’s Tub Chair for new customers, and slashing prices on stock. It seems Pugachev isn’t buying.

Control of Linley’s business, that is. It has been confirmed that Pugachev purchased from Linley something Russians rarely do — a small minority shareholding, with one seat on the company board. His is one seat among 7 — 4 non-executive directors, 3 executive directors. Linley retains the majority and control shareholding. Pugachev appears to hold about 10%. Linley’s company isn’t disclosing what was paid for the stake, and what more Pugachev may have agreed to invest, if anything. It isn’t clear whether Pugachev’s investment and his seat on the Linley board warrant permission from the Federation Council for the senator to conduct such a business role, in addition to his electoral duties, under Russian law.

What is clearer in Russia is that Pugachev’s attempt to take control of St. Petersburg principal shipyards, and consolidate them into a single maritime construction business, has failed to win Kremlin or Defence Ministry approval. This outcome casts doubt on the presumption, widely circulated until recently in Russia and abroad, that Pugachev was protected by Putin. The upshot is also that his shipyard holding, and poissbly also his bank, are stuck with substantial obligations, and a future order-book without state underwriting or guarantees.

Baltic’s accumulated debt has been reported at Rb4.5 billion ($132 million). How much is a non-performing loan on the books of Mezhprombank is not known.Baltic officials referred questions about the shipyard’s financial and production operations to UIC. UIC spokesman Dmitry Morochenko said he would not be replying today.

At the Industry Committee of the St. Petersbury city government, Alexander Radzhisin said that last week, on April 4, a fire had broken out at the Baltic Plant. Noone was hurt, he said, but the incident reminded the city government that “the position of the city is to support the workers. To move the plant now would mean that workers, who are already facing the crisis, won’t be able to get a new job.” He noted that Pugachev has yet to apply to move the shipyard, if that’s his intention. “Any relocation plans should be drawn up with a full explanation of what will happen to the city infrastructure and its citizens. Such plans have not been submitted, so far as I know.”